Asymmetric Information: End of Chapter Problem

You are driving on a trip and have two choices on the highway to stop for a snack: a well-known chain or a local restaurant that you have never heard ol'but that looks okay. Macmillan Learning 1? a: What lessons from this chapter might lead you to choose the chain even it" you think that their food is just average? (3' The chain has a stronger incentive to maintain its reputation than the local place—you are likely to encounter another instance of the chain elsewhere, but the local restaurant will get you to buy at most one meal there. (3' Eating at the local restaurant presents a moral hazard problem. Once you are sealed, the local restaurant can treat you poorly and it is likely you will not leave. (j Eating at the local restaurant presents an adverse selection problem. The owners of the local restaurant could have bought a franchise instead of operating independently, but their management skills are clearly insullicient tor the chain's standards. (3| That the local restaurant is still local and not a chain is a signal that the local restaurant is worse than the chain. It the local restaurant were a better establishment, it is reasonable to expect it to grow to more than one location. How might you choose diti'erenlly if you had access to the Internet? C) Having access to the Interrlet enables you to gather more information by reading reviews, but since most reviews would be from local diners, the signals would be less usel'ul to you as an outsider. I Q) Potential diners having Internet access gives the local restaurant a stronger incentive to maintain a good reputation. You may be able to only dine there once, but you are still able to leave a bad review it" the restaurant does not meet expectations. (j Internet access would not change the information relevant to the decision ol'where to eat. The logic in the previous part stands. How might you choose dill'erently if these two choices were in your neighborhood"? (j Eating at the local restaurant stiIl presents a moral hazard problem. Once you are sealed, the restaurant can treat you poorly with a lower risk ol'your leaving. (3' As a local yourself, you know that the best restaurants are always located on the highways. (3| The local restaurant now has an equally strong motive to maintain a good reputation with you. Like the chain, the local restaurant can earn repeat business from you.

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